SEK: Slowly stepping out of the perfect storm - ING

Bar the post Lehman Brothers bankruptcy price action, EUR/SEK has never been so overvalued, being 10% expensive just three weeks ago based on ING’s BEER model notes Petr Krpata, Chief EMEA FX and IR Strategist at ING.

Key Quotes

“While the past six months formed a perfect storm for SEK (Brexit spillovers, Trump victory and a dogmatic Riksbank), some of these negative factors should fade in 2017, offering scope for SEK to rebound closer to its EUR/SEK 9.00 fair value.”

“While the Riksbank remains very vocal about further easing and its unwillingness to see sharp SEK strength, this should not be inconsistent with gradual SEK strength next year – particularly when the central bank should continue the process of ‘silent’ QE tapering (whereby every future QE extension is lower in size and insufficient to match the ECB’s QE in one-to-one fashion).”

“SEK is also less vulnerable to a Trump-lite scenario as long as protectionist policies remain within a limit and do not influence global trade meaningfully (Sweden is the second most open economy in the G10 FX space – hence the US authorities’ stance on protectionism is crucial for the krona). If anything, SEK is resilient to the second order effect of the Trump victory – rising UST yields. This is because: (1) a lack of search-foryield-driven positons in SEK and Swedish bonds; and (2) until recently the funding nature of SEK. Hence, the SEK’s resilience (along with CAD and GBP) since the US election, as FX price action has been US Treasury driven. By the same token, SEK (and NOK) should be less vulnerable to any ECB QE tapering driven bund sell-off (as was the case in 2Q15). Moreover, as long as EUR/USD benefits meaningfully from rising bund yields, this should translate into non-negligible SEK and NOK gains against USD from mid-2017.” 

“We look for a gradual EUR/SEK decline, yet don’t expect the cross to reach its fair value level next year. This is because SEK should remain vulnerable to negative Brexit headline news – as has been the case so far this year. EUR/SEK has been trading with a persistent risk premium since the Brexit vote (as markets perceived Sweden as potentially the next-in-line non-EMU country vulnerable to EU exit swings). Hence, we pencil in EUR/SEK at 9.20 rather than 9.00 by end 2017. 2H16 should see a particularly sharp fall in USD/SEK as EUR/USD bottoms and EUR/SEK continues to decline.”